Review by Richard Duke of the book: The Skyscraper Curse–And How Austrian Economics Predicted Every Major Economic Crisis OF The Last Century

A general, but serious, reason to read this book—The Skyscraper Curse: And How Austrian Economics Predicted Every Major Economic Crisis of The Last Century–is to avoid being one of the millions who will be duped when the next crash (bust) hits. Millions were and continue to be duped as to the reason(s) for the boom leading up to 2007 and 2008 and why the bust occurred in 2008 relating to real estate.

The purpose of writing reason follow by (s) is that the primary cause of booms that must be followed by busts is the Federal Reserve (Fed) with secondary reasons emanating from the Fed and its lower than market interest rates.

The following words from the book are a serious example of why the book must be read:

Cantillon (pronounced Cantion) showed how the interest rate and the money supply can create changes and distortions in the economy, a phenomenon now referred to as “Cantillon effects.” p. 15.

Monetary inflation depends on who gets the money and credit first and who gets it last. As fiat money [currency] is created by central banks, private banks are in a position to expand the amount of loans they make. The wealthy have established relationships with the banks, and they have the real estate and assets to provide collateral for the loans. Large, established companies and wealthy individuals are in favorable positions relative to small businesses and people with low or average incomes. The loans allow big companies and wealthy individuals to invest in capital goods during the boom phase of the business cycle. Central banks thereby create artificial inequality and poverty. This is the primary Cantillon effect of redistributing wealth.” pp. 229-30. [please read this paragraph carefully]

Several people advised me that a light bulb went off when they read the foregoing quoted words from the book. People, who are not controlled by “materialism”–the opium of unsound money and inflation (creation of currency and credit out of thin air–legalized counterfeiting) begin to understand the benefits to the first recipients of newly created currency or credit versus the transfer of wealth (theft) from the later recipients. They begin to see the transfer of wealth and the helping of the first recipients, beginning with the government (state), and further see that this is just plain theft. The definition of theft remains theft in operation even though the state passed laws making the theft legal. As the book discusses, and as written, taught and discussed by other Austrian economists, the Fed and the fractional reserve banking system transfers wealth, especially from the poor, to the state (federal government), the elitist partners of the government and those working for the state; and to Wall Street banks.

The author’s book discusses the causes of booms—overinvestments and malinvestments–beginning with the foundational cause from artificially low interest rates set by the Federal Reserve (Fed), the central bank. Most people do not understand that fiat currency and credit are created out of thin air. They cannot imagine someone at a computer hitting keys and entering “money” or credit into a bank account. This book discusses credit creation—the main vehicle used to create new so-called money [credit] so that a layman can understand how it is created and the implications to first recipients and later recipients.

This book is especially for any person who does not understand or has never heard of the Austrian business cycle theory (“ABCT”). Unless one has a basic understanding of the ABCT, he or she cannot understand the primary and secondary reasons for an causes of a boom and why a bust (crash) must follow. Without understanding the ABCT, a person is subject to hearing and believing improper and false reasons given by the mainstream. The mainstream exists to perpetuate the causes of the mainstream.

The mainstream in economics consists of Keynesians, monetarists and others, are those who follow the principles, or many of the principles of John Maynard Keynes. The cause of busts, according to Keynes, was the “animal spirits” of people—the best he could come up with showing he had no clue either for the causes of booms or the required following consequence of busts.

When a crash (bust) occurs like the real estate crash in 2008, the mainstream spews out false and misleading reasons. Like Keynes, those in the mainstream have no clue of the cause(s) of a boom and why a bust must follow. The fiat currency and especially created credit is like a drug, which causes power (control) to some, including the state, and addiction to many others. If the addict continues to survive by injecting more and more drugs, he will eventually crash or die. This book shows the reader that the addiction to fiat currency and credit must end in a crash and the continuous injection of credit by the Fed and the state is only making the addiction greater, with a necessarily resulting greater crash.

It is important that more of the public understand the concept and reality of “roundaboutness of production” in the structure of production. The author, in discussing the concepts of (i) roundaboutness of production, and (ii) the structure of production (together as “action”) uses a “natural, concrete example of it in action” so that one unfamiliar with these concepts can grasp the important meaning. The example, as he saw in his early childhood, was dairy farms. The farmer fed and milked the cows in the barn and then took the milk to his family. Then through a more roundabout production process, dairy cattle fed on grass in fields, then were milked in barns. The milk was then transported a short distance in a small tanker to several small dairies, where the milk was processed and packaged. The next day the milk was delivered to houses and empty bottles were picked up. Over time the rounda­boutness of production resulted in replacement by eighteen-wheel refrigerated tankers delivering from the farms to dairy factories and then to supermarkets.

The dairy example is used to show that the roundabout production process takes time. Milk travels greater distances. This requires a greater amount of capital and advanced technology with less labor per unit of milk. The result is the overall cost of milk is lower with competition between large dairy wholesalers and supermarkets.

The dairy example further shows the requirement for entrepreneurial vision, investment of more capital goods, new technology, and the rearranging of the production process, taking a great amount of time. In addition, the entrepreneurs had to have access to savings, based on time preference, in which to borrow against.

The book explains what interest really is, teaching about high and low time preference. The author explains the difference of an entrepreneur borrowing from real savings of people—with low time preferences—verses borrowing at below market interest rates set by the Fed and credit created digitally out of thin air (little or no savings). This book shows more credit or currency creation placed into the market does not produce wealth but at best over investment and malinvestments. The reader will know that real wealth is based on the signals sent to entrepreneurs by savers with low time preferences (not spending greatly) that they can borrow and spend time creating goods and products, that will eventually be sold to consumers when they have a higher time preference. Remember, it took time to go through the innovations in the dairy example. When people have low time preferences, this means they are saving more and spending less. Entrepreneurs can borrow from those real savings (not currency and credit created out of thin air) to produce over time. When people have high time preferences, they are spending more. Keynesians want consumers to always have a high time preference and spend, spend, and spend. In other words stay in debt.

One of the more important discussions for the reader to understand is the Cantillon effects. This shows that newly created currency and credit benefit the first recipients at the expense of later recipients of such currency and credit. People receiving the money later are poorer because of the consequence of this newly created currency and credit, which is higher prices. The author shows that the biggest winners come from the Federal Reserve and the bank system’s creation of newly created currency and credit are the U.S. Government, its large contractors, such as weapons manufacturers, big banks, and Wall Street. The author further shows that the financial sector of the U.S. economy has, therefore, grown enormously causing economic inequality measured in terms of income and wealth. This has occurred dramatically since the U.S. went completely off the Gold Standard in 1971. The losers are also revealed: the labor class consisting of private-sector workers, those on pensions or fixed incomes.

The publisher’s website (Mises Institute–www.mises.org) also states reasons that the book is a must read:

“The Skyscraper Curse is Dr. Mark Thornton’s definitive work on booms and busts, and it explains why only Austrian economists really understand them. It makes business cycle theory accessible to a whole new 21st-century audience.”

And they need it, especially those under 40. Many of the brilliant quants working on Wall Street and at the Fed barely remember the Crash of 2008, much less understand it.”

So when the experts said “Nobody could have seen this coming,” the Mises Institute had Mark’s articles and papers ready to go. The housing crash, and the meltdown in equity markets less than a year later, were thoroughly explained by Austrian business cycle theory. And Mark was the capable face of the Mises Institute during it all.”

And the final reason for reading this book, although there are many more, is that without a lay-friendly book like The Skyscraper Curse, millions more Americans will be duped by the next crash.